10 years after divestiture by AT&T;, Baby Bells and competitors flourish Breaking up HARD to do BELL BREAKUP: 10 YEARS LATER

Michael DresserTHE BALTIMORE SUN

Ten years after the breakup of the nation's telephone monopoly, Ruth Taylor still mourns the demise of Ma Bell.

"AT&T; was the only thing that worked perfectly and the government broke it up," says the 79-year-old Towson widow. "It is a shame; it was the only thing that was perfect in this world."

But Robert Allen, chairman and chief executive of American Telephone & Telegraph Co., has long since put away the black crepe. To him, the Jan. 1, 1984, dismembering of AT&T; has been a boon for his company and his country.

"The bottom line for most consumers is that the system works better," he says.

A decade after the largest antitrust settlement in U.S. history took effect, it is increasingly clear that the breakup of the Bell System was one of the defining events in U.S. economic history. AT&T;'s agreement to sever ties to its local operating companies marked a turn away from an era of regulation and stability, and into an era of fierce competition and rapid technological change. It toppled an icon that symbolized respected authority.

"From a legal and business perspective it was one of the biggest stories of the last 25 years, certainly," says John Glynn, the people's counsel who represents consumer interests before the state Public Service Commission. "It had an everyday impact on people's lives that more exciting stories don't."

Today, free-market conservatives point to the drop in long-distance rates since 1984 as vindication of the power of competition. And nobody has benefited from divestiture more than Big Business, the most voracious user of the nation's

While the old AT&T; could be arrogant and bureaucratic, it was convenient, easy to understand and cheap for those who made few long-distance calls. After 10 years of dealing with separate long-distance and local telephone companies, many consumers remain confused by burgeoning choices.

"The major thing that the breakup did was make the phone bill so confusing," said Sue Fitzsimmons, a state social services worker from Northeast Baltimore. "It used to be we knew exactly who to call if we had a problem with our phone system or our phone bill. Now it's a round robin of where do you call when you have a problem."

Many consumers are also convinced that they have been stuck with the post-breakup bill. The average monthly bill for residential service has risen from $13.35 in 1984 to $18.66 in 1992, says the Federal Communications Commission.

"What you've basically seen since 1984 is that local rates have gone upwith inflation, and long distance has gone down," says Peyton Wynns, the FCC's chief of industry analysis. He estimates that long-distance rates declined 35 percent to 60 percent, adjusted for inflation, though some people might see higher bills because usage is way up.

The FCC's figures aren't universally accepted, however. Bruce Kushnick, a former industry consultant who formed the New Networks Institute to research telecommunications issues, estimates that local service costs rose 315 percent nationwide between 1980 and 1992 when all new charges are taken into consideration. In local service, Mr. Kushnick notes, consumers essentially traded one monopoly for another in the breakup.

There are also signs that the drop in long-distance rates may have ended.

Mike Raimondi, an economist with the WEFA Group in Boston, says the decline in those rates stopped in 1990. Since then, he says, prices have risen as the three main long-distance companies settled into a complacent oligopoly.

Nobody has seen fewer benefits from divestiture than those people whom Nicholas Johnson, formerly a member of the Federal Communications Commission, calls "Aunt Polly" -- elderly people of limited means who would be perfectly content with a black rotary-dial phone for chatting with hometown friends. Divestiture ended the subsidy from long-distance calls that kept local rates low.

Confused consumers

The breakup has brought a host of new telephone services, but they have been slow in catching on with confused consumers. Bell Atlantic's call-waiting feature has reached 45 percent market penetration, but a host of others -- including Caller-ID and Answer Call -- have failed to move into double digits.

"Clearly, we've got a much greater range of choices of equipment or services than there would have been if we had left it in one company," says Mr. Johnson, a maverick who prodded the industry toward competition in the late 1960s and early 1970s. "Clearly, we have paid an enormous amount for it."

The highest price for divestiture was paid by people like Lee EstherJohnson of Northeast Baltimore, who lost her job with Western Electric when AT&T;'s manufacturing arm closed its Southeast Baltimore factory in 1984, soon after the breakup.

When the factory closed, she lost a job that paid $9.56 an hour, with good benefits. Her highest pay since then has been $7.91 an hour. Now, at age 50, she faces many more years at work, rather than the possibility of early retirement. At the time, the company blamed the breakup for the layoffs, but it is by no means clear that the jobs would have been safe if AT&T; had remained intact.

Jeffrey Miller, director of communications for the Communications Workers of America, estimates that divestiture resulted in the elimination of 130,000 members' jobs at AT&T; and the seven regional Bell operating companies that were created in the settlement. He says he isn't even counting the thousands of management jobs abolished as former monopolies positioned themselves for a competitive market.

But divestiture also has produced job gains that are not as visible as the layoffs throughout the old Bell System. For instance, MFS Communications Co., an upstart provider of fiber-optic phone links for businesses, has gone from a start-up in 1988 to providing 800 jobs and is "hiring all the time," said a spokeswoman, Claire Fennell.

Royce Holland, president of the Omaha, Neb.-based company, says those jobs probably would not exist had it not been for divestiture.

"If the Bell System had not been broken up, it is questionable if we would have had the market opportunity, even on a limited basis," he said. "It opened the door for a lot of new players like MFS."

Other beneficiaries carry more weight. MCI Corp., AT&T;'s nemesis in the courts and long-distance marketplace, has grown from 8,000 employees at the time of divestiture to 35,000.

But most of those new jobs give little comfort to the CWA. Like many of the newer players in telecommunications, neither MCI nor MFS is unionized.

For people who worked for the old Bell System, Jan. 8, 1982, is a date they will never forget. News that their executives had agreed to the antitrust settlement struck with the force of an earthquake.

"It's not dissimilar to, 'Do you remember where you were when Kennedy was shot?' " said Frederick D. D'Alessio, now president of Chesapeake & Potomac Co. of Maryland but then a middle manager with New Jersey Bell.

The settlement was stunning in its breadth. AT&T; would surrender its entire network of local operating companies, two-thirds of its total assets. The Bell empire would be divided into seven parts, each controlled by a new regional holding company. AT&T; could keep its prized Bell Labs research arm and its Western Electric manufacturing subsidiary.

Day of betrayal

To many devoted "Bellheads," as longtime employees of AT&T; were called, it was a day of betrayal. For years, they had absorbed the doctrine that the Bell System was a "natural monopoly." To them, the idea that the nation might be better off with a decentralized network was not just misguided economic theory -- it was heresy.

But Ma Bell appears more benign in blessed memory than in reality.

In the years before the divestiture suit was filed, the Bell System came under severe criticism for letting its network deteriorate in many parts of the country, especially New York. AT&T; representatives often treated customers as if were doing them a favor. Lily Tomlin's classic comic routine as Ernestine, the rude telephone operator with the trademark snort, hit a nerve because it was based on reality.

And the simplicity of Ma Bell had hidden costs -- ones that were already taking a toll on the nation's economic strength at the time of divestiture.

"The old, sort of stodgy, one-provider, heavily regulated world probably offered greater protection to the weakest parties," says Mr. Glynn, the people's counsel. "The other side of the coin is that in that old world, companies actually suppressed technological change."

A competitive survivor

Today, divestiture and competition have made AT&T; a more competitive, market-oriented company.

A recent New Yorker article -- distributed by AT&T; in a press kit celebrating the anniversary of Ma Bell's doom -- compared the fates of AT&T; and IBM, which "won" an antitrust battle of its own when the Reagan Justice Department dropped a lawsuit against it the same day that it accepted AT&T;'s surrender.

The article pointed out that in recent years, IBM, left intact in its mainframe empire, fell from grace as technology overtook it. AT&T;, forced to redefine itself, has prospered in a competitive market.

"If it was still essentially in the form of a monopoly, I don't believethat as good as the Bell System was, it could have been as responsive as necessary," Mr. Allen said.

Mark Cooper, research director of the Consumer Federation of America, has been deeply disappointed by the results of the Bell breakup. Still, he says, 10 years is too soon to proclaim it a failure.

"The final judgment on divestiture is yet to be written," he says. "The breakup was only a small part of the reform of telecommunications."

Further reform on horizon

The second phase of that reform, designed to spread competition to all areas of telecommunications, could come next year.

After years of wrangling, Congress and the executive branch have united around a broad set of principles that could form the basis for the most sweeping rewrite of communications law since 1934.

The proposed legislation, which would drop most barriers keeping the regional Bells out of other lines of business, could come just in time. Having taken a decade to digest the effects of the breakup, the industry is hungry for competition again.

The Baby Bells created in the settlement are clamoring to enter ** the long-distance market and are casting a greedy eye on each other's territories. The rush to roll out new technologies, like video-on-demand and interactive games, has never been so fierce.

Ken McGee, a telecommunications analyst with the Gartner Group in Stamford, Conn., believes that this year's convergence of the telephone and cable-TV industries marked the dawn of a new era in the history of telecommunications.

"We can still see the framework of the Bell System that was broken 10 years ago," he said. "Ten years from now, I don't think we'll recognize the industry at all."

Pacific Telesis Group

Headquarters: Walnut Creek, Calif.

Territory: California, Nevada

1984 employees: 76,881

1993 employees: 61,346

Sales, 1984: $7.8 billion

Sales, 1992: $9.9 billion

Profit, 1984: $829 million

Profit, 1992: $1.14 billion

Total shareholders' return 1/1/84-6/30/94: 500%

SUMMARY: Smallest of the regional Bells, depends almost entirely on California. Rises and falls with quirky regulators there. Tense relations with regulators exacerbated when company was caught selling advanced services to people who didn't speak English. Responded to regulatory woes by spinning off wireless communications unit this month, putting services beyond regulators' reach. Has avoided the cable acquisition game and has hunkered down in its economically laggard bastion. Questionable strategy because company seems to have more reason than any other Bell company to diversify out of state. In November, announced $16 billion, seven-year commitment to build a hybrid fiber-optic/coaxial cable "superhighway" bringing video, voice and data services to homes and businesses throughout state. Seeking a cable TV partner.

AMERITECH

Headquarters: Chicago

Territory: Illinois, Indiana, Michigan, Ohio, Wisconsin

1984 employees: 77,514

1992 employees: 71,300

Sales, 1984: $8.4 billion

Sales, 1992: $11.2 billion

Profit, 1984: $990.6 million

Profit, 1984: $1.346 billion

Total shareholders' return 1/1/84-6/30/94: 555%

Summary: Long regarded as sleeping giant, may be rousing itself to meet increased competition. Recently announced it would seek permission to give up local exchange monopoly in exchange for option of offering long-distance service to regional customers. An incomplete vision for future, some say. Still, move is uncharacteristically bold for stodgy company that prefers to stay close to home. Primarily, runs a highly respected white-bread telephone system. Has no cable partnerships and only significant foreign venture is one in New Zealand pay TV. Has been slow to roll out new products such as Answer Call, lagging years behind the more aggressive Bells. Torn by dissension recently as restructuring left many bruised feelings. Relations with regulators have been tense.

Summary: Was golden child in aftermath of Ma Bell breakup, but hurt by recession. Since 1984, dead last among peers in total return; has highest cost structure. Aggressive in its pursuit of cellular, paging and international acquisitions. But $250 million investment in Prime Management cable television network looks like me-too deal after bolder moves by US West and Bell Atlantic. Has alienated workers by announcing job cuts while pouring money into QVC's bid for Paramount. Has had trouble with state regulators, including some of its own making, such as Florida corruption scandal. Installing ambitious distance learning network in North Carolina. But ranks among the least aggressive Bells in deployment of a broadband digital network, despite heavy competition for business customers.

Summary: Has managed to turn lemons into lemonade better than any other regional Bell. Started with least appealing territory -- 14 sprawling states, each with a different regulatory board and none densely populated. But now the only regional Bell whose stock is on "buy" list at Alex. Brown & Sons, partly because sprawling turf is unattractive to competitors. Well-positioned to poach in other Bells' territories, especially with strategic investment in Time Warner cable business. Took steps to establish brand name long before peers. Only Bell Atlantic in its league as a technological innovator. Slow to deploy an advanced switching system, but committed to spending billions of dollars to upgrade network over next 20 years. Caveat: Has won incentive-based regulation in only half its states.

SUMMARY: If Bell Atlantic is regarded as Mercedes of regional Bells, Nynex is the Yugo. Widely regarded as a laggard in upgrading network and defining a vision for future. Has tense relations with regulators and customers. In recent years, return on equity the lowest of the Bells, and ended 1992 with the highest proportion of employees to access lines. Inherited perhaps the most troubled part of Bell system and the one most attractive to competitors, who have stolen many corporate customers. States present tough regulatory climate, and Nynex missteps have compounded problem. Analysts say network has deteriorated. Recent sign of life was $1.2 billion investment in Viacom, but company may have backed wrong horse in the Paramount fight.

Southwestern Bell Corp.

Headquarters: San Antonio

Territory: Missouri, Arkansas, Kansas, Oklahoma, Texas

1984 employees: 71,860

1993 employees: 59,400

Sales, 1984: $7.2 billion

Sales, 1992: $10 billion.

Profit, 1984: $883 million

Profit, 1992: $1.3 billion

Total shareholders' return 1/1/84-6/30/94: 585%

SUMMARY: Not considered a technological leader, but has reputation for smart acquisitions that contribute to the bottom line. In February, became first regional Bell to enter cable industry by agreeing to buy systems in Montgomery County and VTC in Arlington, Va. Move was direct challenge to Bell Atlantic. Purchase of Cellular One, questioned when made in 1987, has turned out to be solid investment. Interest in Telefonos de Mexico makes solid contributions to earnings. Another example of aggressiveness: recent $4.9 billion partnership with Cox Cable Communications, nation's fifth largest cable company. Weak spot could be deployment of an advanced broadband network. Since divestiture, has led the Bells in total return to shareholders.

BELL ATLANTIC CORP.

Headquarters: Philadelphia

Territory: Maryland, Virginia, Pennsylvania, New Jersey, Delaware, West Virginia, District of Columbia

1984 employees: 80,000

1992 employees: 71,400

Sales, 1984: $8.09 billion

Sales, 1992: $12.65 billion

Profit, 1984: $973 million

Profit, 1992: $1.3 billion

Total shareholders' return, 1/1/84-6/30/94: 525%

Summary: Highly regarded for its technological ability, and the only regional Bell company to let local affiliates reinvest a large chunk of their earnings in the phone network. Also a leader in marketing new premium telephone services, and in cultivating cordial relationships with state regulators. Has escaped from rate-of-return price limits in all its states and has been allowed to switch to incentive pricing, profiting from newfound efficiencies. Very aggressive in challenging legal restrictions on its lines of business -- a strategy that paid off this year when a federal judge allowed it to provide video services over its network. CEO Raymond Smith respected for his strategic vision, including recent deal to acquire Tele-Communications Inc. Caveats: territory is inviting for competitors and company carries a high debt load.